Markets
Austrian ECB Governor Holzmann, never shy to drop a juicy quote, solidified his reputation as biggest hawk. He said the central bank should hike rates by 50 bps in March, May, June and July while it should also consider adding PEPP to QT in the fall. That would bring the deposit rate from 2.5% to as high as 4.5%. Holzmann said rates need to be much higher to constrain economic growth and dampen inflationary pressures. Only at 4% “would we roughly get into the restrictive area”. Having this view, it tells us something about his expectations for (structurally higher) inflation. Holzmann assumes that core inflation won’t weaken significantly in the first half of the year, hence the need for drastic central bank action. Chief economist Lane stuck to the data-dependent approach and said that economic data will guide policy after the March meeting. He did add that current information suggests more is needed. Euro area money markets inch a little closer to a 4% peak policy rate. It also helps explain the relative underperformance of the front-end of the European/German yield curve. Germany’s 2y yield rose several bps on Holzmann’s Handelsblatt interview with momentum gaining as US dealings get going (now +7.5 bps). Current changes on the remainder of the curve vary between +3.5 bps (5y) and -3 bps (30y). US Treasuries ease a few bps ahead of Fed Powell’s appearance before the Senate tomorrow, the House on Wednesday and the payrolls report on Friday. Yields lose up to 2 bps across the curve. Treasuries are well off their intraday highs though. The Euro Stoxx 50 advances 0.4%, testing the previous recovery high at 4316.17. Wall Street opens with modest gains after Friday’s sharp run higher.
In FX space, the three biggest currencies – dollar, euro, yen – prove worthy to each other. Bund underperformance allows the common currency to eke out a gain vs the others though, making it the top performer of the day. EUR/USD moves towards interim resistance at 1.068. The Swiss franc is also doing well today, gaining against every G10 peer but the euro following faster than expected inflation (see headline below). Lagging the pack are the AUD and NZD. Both are probably a bit disappointed by the relatively muted growth target put forward by China. In Central-Europe, the Hungarian forint continues to outperform. EUR/HUF advanced to 380 on Friday but having avoided the (HUF) break lower, the forint is already staging a comeback today (EUR/HUF 377).
News & Views
Inflation in Switzerland in February accelerated by 0.7% M/M to 3.4% Y/Y (0.6% M/M and 3.3% Y/Y in January). Core inflation ticked up from 2.2% Y/Y to 2.4 %. According to the Federal Statistical office, the monthly increase ‘is due to several factors including rising prices for air transport, package holidays and supplementary accommodation. Housing rentals also recorded a price increase, as did petrol. In contrast, prices for heating oil decreased as well as those for new cars and berries’. In this respect, inflation is holding well above the 0%-2.0% target range from the Swiss national Bank (SNB). The January and February inflation readings will also likely cause Q1 inflation to stay above the 3% December SNB forecast. The SNB holds its next policy meeting on March 23. Today’s data suggest another rate hike of at least 50 bps is warranted with the potential for a further step in June. The Swiss franc initially gained from about EUR/CHF 0.996 to test the 0.9925 area, but couldn’t hold on to it (now 0.995).
The Hungarian statistic office reported that the volume of sales in retail in January decreased by 4.5% Y/Y (data adjusted for calendar effects). Sales volumes decreased by 4.8% in specialised and non-specialised food shops, by 1.5% in non-food retailing and by 9.7% in automotive fuel retailing. The volume of mail order and internet retailing accounting for 8.6% of all retail sales fell by 7.6%. The January figure compared to a-4.1% decline in December. The data indicate that persistent elevated inflation (25.7% in January) and a tightening of monetary conditions by the MNB are slowing consumer demand. Still the forint remained well bid today, with EUR/HUF easing from a close near 379 on Friday to currently trade in the 377.25 area. Forint resilience today was probably partly due to Moody’s on Friday giving no review of the Hungarian Credit rating (Baa2). Some market participants feared a rating downgrade or a change in the stable outlook assessment.
